When Mellon Bank Corp. and Dreyfus Corp.revealed just over a year ago that they would join forces in a $1.7 billion stock swap, the deal, although it would dilute Mellon's per-share earnings, was heralded as a natural fit and the wave of the future for the banking and mutual-fund industries.
But now, barely four months after Mellon completed the acquisition, the signs of stress in this first big combination of a bank and a mutual fund company are becoming increasingly apparent. While no one is suggesting that the deal till unravel, it's clear that the honeymoon, if there ever was one, is over. And though Dreyfus and Mellon executives still cling to their original vision of the combined company as a financial-services powerhouse for the masses, the day when that will materialize, insiders say, now seems further away that it did just months ago.
SHUNTED ASIDE. Much of the problem is cultural. Mellon had little understanding of the mutual-fund industry, and its bean counting, technocratic culture, sources say, clashes with Dreyfus' lackadaisical management style. That contributed to Dreyfus' lagging behind other major fund groups. Other than cost-cutting, Mellon seems to be offering little direction to Dreyfus, adding to the malaise.
The disquiet has been further exacerbated by the sharp downturn in the mutual-fund business generally. Dreyfus has been losing market share to others, although its decline has slowed in recent months, according to consultants Financial Research Corp. Under pressure to meet optimistic 1995 earnings projections and struggling to deal with setbacks at its Boston Co. unit, Mellon, these sources say, is sharply curtailing compensation, spending for new initiatives, and other costs. Some say that could threaten the competitiveness of the combined company.
Sources within Dreyfus say Dreyfus chief Howard Stein, who was initially ebullient about the new entity's prospects, has been shunted aside and has become disillusioned with Mellon's ax-wielding approach to integrating the two companies. Stein would say for the record only that the combined company has "all the ingredients and disciplines to make it work." But he also questions whether "they have that special gift to make it an overwhelming success."
Mellon Chairman and Chief Executive Frank V. Cahouet and Vice-Chairman W. Keith Smith, who also serves as Dreyfus' chief operating officer, defend the deal: "There's a great deal of enthusiasm with the direction we've set and the environment that's been created," says Smith. "We've only owned the company for four months, but what we see of it we really like," says Cahouet. "The culture fit is very comfortable."
Some competitors expect Dreyfus to show better results as it makes more use of Mellon's distribution system. The new institution "is something the industry in general is going to have to look out for," says one rival.
Other observers take issue with Cahouet's assessment, though. "None of this [the culture clash] comes as a surprise," says A. Michael Lipper, president of Lipper Analytical Services Inc. The cultures are "very different." He thinks Mellon "got into the position where they paid a lot of money for Dreyfus and are going to try to drive as much to the bottom line as possible."
VOID. Says Jay R. DeMartine, Dreyfus' former marketing chief: "The reality is that much of what Mellon has done is necessary. They're bringing greater business discipline. But the skills seem more like the skills of an acquirer than an entrepreneur.... Bankers aren't used to being in the direct marketing business."
The most visible signs of upheaval are changes at the top. On Jan. 5, Dreyfus was expected to announce that, contrary to the original plan, Dreyfus President Joseph S. DiMartino, 51, had resigned his Dreyfus post and Mellon directorship as of Dec. 31. He is expected to be replaced by Mellon's Smith, who had already begun to assume many of DiMartino's duties. DiMartino, who joined Dreyfus in 1971 and became president in 1982, insists that he suggested the idea of changing responsibilities. He says the move was prompted by a desire for a change of "lifestyle" and not by any "dissatisfaction with anything going on in the organization."
On Dec. 30, marketing chief DeMartine, who joined the mutual-fund concern only nine months ago, quit to accept a similar post with the Strong Funds, leaving a critical void in the marketing effort. DeMartine's departure follows closely on the heels of the resignation of Kirk Stumpp, a marketing vice-president for new product development. "The marketing department is the guts of a mutual-fund company," said one Dreyfus source. "It's been decimated." DeMartine declined to comment on his reasons for leaving, and Stumpp couldn't be reached for comment. In addition, Dreyfus has been plagued by defections by analysts and back-office personnel, insiders and Wall Street sources say. "We've seen a number of resumes," says Lipper.
To be sure, such management and personnel flux occurs after many mergers. But other developments are more troublesome. In the 12 months since the merger announcement, mutual funds have been pummeled by rising interest rates, and Dreyfus has been especially hard hit. It has lost about $10 billion, or 12.5%, of its assets, and its market share declined from 3.7% in December, 1993, to 3.1% in October, 1994, according to Financial Research. "We've taken a pretty good sized hit," says DiMartino.
Problems at Mellon's Boston Co. unit, an investment management company that Mellon bought from American Express Co. for $1.4 billion in May, 1993, are said to be distracting Mellon executives and resources from the task of integrating Dreyfus. In November, Mellon said it would write off $130 million as a result of losses on derivatives holdings by Boston Co.'s securities lending business, rather than pass the losses on to clients. Dreyfus sources think these pressures have prompted deeper cuts in spending for business development, compensation, and technological improvements than either company originally contemplated.
Mellon concedes some problems. Last year, Cahouet predicted the Dreyfus acquisition could boost Mellon's earnings by 3% to 6% by 1996. He now says this won't happen because of the impact of rising interest rates on Dreyfus' fixed income funds. Still, Vice-Chairman Keith Smith expects 1994 earnings to be up about 10% over 1993. As for the merger, says Cahouet, "With a large transaction there are people who feel good about it and people who don't." For now, at least, many at Dreyfus seem to fall into the latter category.